Statistics updated to reflect current share prices and outstanding shares.



) -- The investment thesis behind the S&P 500 Dividend Aristocrats -- an index composed of large-cap

S&P 500

companies that have increased dividends for 25 consecutive years -- is simple and effective: Increased dividend payouts will compound over time.

For example, a $1,000 investment in a stock yielding 4% -- growing dividend payout 7% annually -- will yield approximately 8% on the original $1,000, 10 years later (assuming no capital appreciation).

This concept is known as "yield-on-cost."

In a perfect world, investors would be able to buy a

Dividend Aristocrats ETF

, sit back and watch their portfolio appreciate. Unfortunately, things aren't so simple. Every December, Standard and Poor's adds and subtracts stocks from the Dividend Aristocrats index as companies come into and fall out of compliance.

In December 2009, two companies were added to the list while

10 companies were eliminated

(notable eliminations include

General Electric

(GE) - Get Report



(PFE) - Get Report


US Bancorp

(USB) - Get Report

). For an individual investor mimicking the index, losses will almost certainly be realized with every eliminated security.

A cautious investor should use the Dividend Aristocrats index only as a starting point for dividend stock ideas -- paying careful attention to the

financial condition and prospects of each company


In the past, we have suggested that income investors periodically subject their portfolio to a "

Dividend Acid Test

*" -- a pass/fail exam that indicates if a company's dividend payout is covered, in full, by the company's

liability adjusted cash flow yield (LACFY)


Of course, a failing grade does not ensure that a dividend cut or elimination is imminent, but rather, that the failed company may have difficulty continuing payouts in the face of operational adversity or a large debt maturity. Similarly, a passing grade offers no guarantee that a company will not face a prolonged hardship or that the company's management will sustain its current dividend policy. Investors must always be cautious.

The following pages contain pass/fail results for 39 of the 42 companies that comprise the 2010 S&P 500 Dividend Aristocrats -- ranked in ascending order by liability adjusted cash flow yield**


*Pass = Dividend yield less than LACFY, Fail = Dividend yield greater than LACFY**To determine liability adjusted cash flow yield, a "short formula" was used, defined as: 5-Year Average Free Cash Flow / ((Outstanding Shares x Per Share Price) + (Liabilities - Cash))Note: In the case of public utilities, "net income" has been used in place of "free cash flow." Insurance companies cannot be valued using a simple cash flow formula -- as a result -- Chubb, Aflac and Cincinnati Financial have been omitted from this list.



(ADM) - Get Report

Archer Daniels Midland is a processor of oilseeds, corn, wheat, cocoa, and other feedstuffs and is a manufacturer of vegetable oil and protein meal, corn sweeteners, flour, biodiesel, ethanol and other value-added food and feed ingredients. (more >>)


Integrys Energy Group


Integrys Energy Group is a holding company for its regulated utility and nonregulated business units. (more >>)


Air Products & Chemicals

(APD) - Get Report

Air Products & Chemicals is a supplier of hydrogen and helium. The company also provides semiconductor materials, refinery hydrogen, natural gas liquefaction and advanced coatings and adhesives. (more >>)



(LOW) - Get Report

Lowe's is a home improvement retailer geared to homeowners, renters and commercial business customers. (more >>)



(TGT) - Get Report

Target is engaged in the operation of general merchandise and food discount stores in the U.S. (more >>)




Walgreen is engaged in the retail sale of prescription and non-prescription drugs and general merchandise. (more >>)


Consolidated Edison

(ED) - Get Report

Consolidated Edison, through its subsidiaries, provides electric, gas and steam utility services in the U.S. (more >>)


Stanley Black & Decker

(SWK) - Get Report

Stanley Black & Decker is a worldwide supplier of tools and engineered solutions for professional, industrial, construction and do-it-yourself use, as well as engineered security solutions for industrial and commercial applications. (more >>)



(CTL) - Get Report

CenturyLink is a communications company, which is engaged in providing communications services, including local and long distance voice, Internet access and broadband services. (more >>)




Supervalu operates as a grocery retailer in the U.S. The company conducts its operations under three retail food store formats: combination stores, food stores and limited assortment food stores. (more >>)



(WMT) - Get Report

Wal-Mart Stores operates Walmart discount stores, supercenters, Neighborhood Markets and Sam's Club locations in the U.S. (more >>)


Pitney Bowes

(PBI) - Get Report

Pitney Bowes is a provider of mail-processing equipment and integrated mail solutions. The company sells and rents a wide range of mail-related products ranging from postage meters to office supplies. (more >>)



(KO) - Get Report

Coca-Cola is a manufacturer, global distributor and marketer of nonalcoholic beverage concentrates and syrups. (more >>)



(PEP) - Get Report

PepsiCo is a global food, snack and beverage company that markets and sells a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods. (more >>)



(MCD) - Get Report

McDonald's franchises and operates McDonald's restaurants in the food service industry. The company and its franchisees purchase food, packaging, equipment and other goods from numerous independent suppliers. (more >>)



(BMS) - Get Report

Bemis is a manufacturer of flexible packaging products and pressure sensitive materials, selling to customers throughout the U.S., Canada, Mexico, South America, Europe and Asia Pacific. (more >>)


W.W. Grainger

(GWW) - Get Report

W.W. Grainger distributes facilities maintenance products and provides services and related information used by businesses and institutions mainly in the U.S., Canada and Mexico. (more >>)




Sigma-Aldrich is a life science and high technology company that develops, manufactures, purchases and distributes chemicals, biochemicals and equipment available throughout the world. (more >>)



(CLX) - Get Report

Clorox is a manufacturer and marketer of consumer products. The company sells its products primarily through mass merchandisers, grocery stores and other retail outlets. (more >>)


Family Dollar Stores


Family Dollar Stores operates more than 6,600 general merchandise retail discount stores in 44 states. Merchandise assortment includes consumables, home products, apparel accessories, seasonal and electronics. (more >>)


PPG Industries

(PPG) - Get Report

PPG Industries manufactures coatings, glass and chemical products. The company is comprised of six reportable business segments: Performance Coatings, Industrial Coatings, Architectural Coatings - EMEA, Optical and Specialty Materials, and Commodity Chemicals. (more >>)


Emerson Electric

(EMR) - Get Report

Emerson Electric designs and supplies product technology and delivers engineering services in a range of industrial, commercial and consumer markets. (more >>)




Brown-Forman manufactures, bottles, imports, exports, and markets a wide variety of alcoholic beverage brands. (more >>)


Abbott Laboratories

(ABT) - Get Report

Abbott Laboratories is engaged in the discovery, development, manufacture, and sale of a broad and diversified line of health care products. (more >>)


Becton, Dickinson & Co

(BDX) - Get Report

Becton, Dickinson & Co is engaged in the manufacture and sale of medical supplies, devices, laboratory equipment and diagnostic products used by health care institutions, life science researchers, clinical laboratories, industry and the general public. (more >>)



(MMM) - Get Report

3M Company is a global manufacturer, technology innovator and marketer of a variety of products. (more >>)



(KMB) - Get Report

Kimberly-Clark is engaged in the manufacturing and marketing of a range of consumer paper products. (more >>)


Procter & Gamble

(PG) - Get Report

Procter & Gamble is focused on providing branded consumer packaged goods. The company markets its products in more than 180 countries. (more >>)


C.R. Bard

C.R. Bard is engaged in the design, manufacture, packaging, distribution and sale of medical, surgical, diagnostic and patient care devices. (more >>)


VF Corp

(VFC) - Get Report

VF is an apparel company, which designs and manufactures, or sources from independent contractors, a variety of apparel and footwear for all ages. (more >>)



(DOV) - Get Report

Dover owns and operates a global portfolio of manufacturing companies providing components and equipment, specialty systems and support services for a variety of applications. (more >>)


Johnson & Johnson

(JNJ) - Get Report

Johnson & Johnson is a holding company engaged in the research and development, manufacture and sale of a range of products in the health care field. (more >>)



(SHW) - Get Report

Sherwin-Williams is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers mainly in North and South America. (more >>)


Eli Lilly

(LLY) - Get Report

Eli Lilly discovers, develops, manufactures and sells pharmaceutical products. The company also has an animal health business segment. (more >>)


Automatic Data Processing

(ADP) - Get Report

Automatic Data Processing offers a wide range of human resource, payroll, tax and benefits administration solutions. (more >>)



(XOM) - Get Report

ExxonMobil is engaged in the exploration, production, transportation and sale of crude oil and natural gas and the manufacture, transportation and sale of petroleum products. (more >>)



(CTAS) - Get Report

Cintas provides specialized products and services to businesses of all types, mainly throughout the U.S. and Canada. (more >>)


Leggett & Platt

(LEG) - Get Report

Leggett & Platt is a manufacturer that conceives, designs and produces a range of engineered components and products. (more >>)




McGraw-Hill is a global information services provider serving the education, financial services and business information markets with a range of information products and services. (more >>)

-- Written by John DeFeo in New York City

Follow @johndefeo


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